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Keeping an Eye on the Ball: Credit Unions, the Level Playing Field, and Competitive Balance

By Blayne Haggart, PhD, Visiting Scholar, Regulatory Institutions Network, Australian National University
on February 21, 2012

Financial sector policymakers should think in terms of chess clocks and golf handicaps. Instead, they all too often fall under the sway of a very powerful metaphor that winnows down the art of financial sector policymaking to the simple act of designing a “level playing field,” where everyone operates under exactly the same rules regardless of size, purpose, or structure.

As anyone working in the financial services sector can tell you, the free market is all too often not very free at all. Credit union activity is seriously constrained by rules governing, for example, money laundering and terrorist financing, member privacy, governance, interest rates and fees, branch accessibility, payment systems, and, of course, capital and liquidity requirements. This is just a top-of-mind list. We could go on. And on. And on.

While the broad policy objectives behind most, if not all, of these rules are unobjectionable—who doesn’t want to stop money laundering and terrorist financing?—policymakers are all too often blinded to the effects of their policies on the competitive landscape, especially as these policies relate to credit unions, because they tend to fall into the trap of thinking strictly in terms of what Haggart calls the “evocative metaphor” of the level playing field. As Haggart notes, the “level playing field” metaphor suggests “images of a football or vii hockey game in which competitors, overseen by a neutral referee following a fixed set of rules, battle for supremacy. Success is dependent on the competitors’ innate skills, not on any favoritism built into the rules or doled out by biased officials.”

But this seemingly neutral and fair approach to thinking about policy—one that has the unimpeachable goal of improving the industry’s economic health, competitiveness, and stability—can sometimes lead to unintended outcomes that hurt the competitiveness of smaller institutions such as credit unions.

This report suggests the need for credit unions to sometimes use a “competitive balance” metaphor when advocating for policy changes that could benefit, or at least minimize the harm to, the credit union system. As opposed to the “level playing field,” the “competitive balance” metaphor forces credit unions and policymakers to focus on ends—achieving an adequate degree of competition in the financial services sector—without prejudging the means by which they are achieved. Where “level playing field” suggests the hockey rink or football field, “competitive balance” suggests handicapping in golf (or chess).

“Competitive balance” is not only a more appropriate metaphor for achieving the desired ends of increased financial health and stronger competition in the financial services sector but also a more accurate reflection of the actual state of regulation in this and other sectors. Haggart adds, “A competitive balance approach to regulation thus offers the potential for more results-driven, reality-based regulation.”